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Being Open to Open Banking

September 10, 2018
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HSBC has a new global strategy, is investing heavily in technology and is embracing open architecture to help its clients with digital transformation. 

Treasurers at multinational corporations face immense pressure to make better use of emerging digital technologies—both to increase efficiency in treasury's key areas of responsibility and to help the larger company meet its strategic objectives. This overarching pressure to automate and embrace transformation has put additional focus on what is perhaps the single most important relationship treasury has outside the company—with its banks.

HSBC is investing heavily in technology and partnering with fintechs that can aid its effort to make banking faster and easier while addressing the often varying needs of corporate clients. In June, HSBC CEO John Flint announced the bank plans to invest $15 billion–$17 billion in technology as part of its growth.

On a conference call, Mr. Flint said, "Technological disruption will accelerate in the coming years. It is therefore essential for the long-term competitiveness of the firm that we keep investing in technology. Being able to invest at this point of the cycle will differentiate future winners from the rest of the industry. We're already seeing leading banks push ahead of the rest. Given our size and scale, we have an ability to invest that others don't, and we need to be better at this than the competition."

But it's going to take strategic application of the investment to help clients. As HSBC acknowledges, when it comes to automation, companies may have different priorities. For instance, a company with an outdated enterprise resource planning (ERP) system may not see upgrading as a priority, preferring instead to focus on new methods of accepting payments. Or a corporate customer may be focused solely on geographic expansion or reorganization and may move slowly on digitalization as it spends time acclimatizing to new markets.

Ultimately, HSBC's strategy rests on the belief it can best service its clients by using all the tools available to it—those developed inside the bank and those developed by third parties—and by organizing the bank to best meet the individual needs of each customer.

New Global Model

As a result, concurrent with its big tech push, the bank's global liquidity and cash management team is realigning how it does business: It has been transitioning from a purely country-based sales model to a global sector sales model. This effort is being led by Lance Kawaguchi, global head—corporates, global liquidity and cash management at HSBC.

"We changed our global banking model to be more industry-aligned," he says, and to move away from being a very country and region-specific bank, aiming for a single approach to client interactions. So how things are done in London are exactly the way things are done in Singapore. For a large multinational client, Mr. Kawaguchi says, there is now "one group that covers it globally, not just for consistency of client experience, but also to make sure that the solutions they are trying to put forth to the treasury team are better tailored to what's important to them. It's not one-size-fits-all."

This is true of cash management, he says, adding that while some observers have said it's become commoditized, at HSBC it's considered strategic. This approach helped HSBC secure Euromoney magazine's Best Bank for Transaction Services awards for both North America and The World in 2018.

"Everything has to be client-centric," Mr. Kawaguchi says. This means all the bank's products and all its solutions have been based on the feedback from clients. Previously, he says, banks tended to work internally "to try and guess what clients wanted instead of asking them what they needed." So far, the sector-based approach is working, based on more recent feedback. "What we're getting from the market and from our sector experts is that it's actually much more efficient for the bank because now we know where to allocate our resources," Mr. Kawaguchi says.

Bring on the Technology

With its sales structure in place, HSBC's global liquidity and cash management team says it can now better deploy its products and strategy to hit all the needs of its clientele—needs that, as mentioned, are very often disparate.

Drew Douglas, head of global liquidity and cash management, North America at HSBC, says he and his colleagues frequently see examples of these disparate or conflicting priorities when dealing with a range of clients. "We have some clients where liquidity and working capital optimization is a priority and we spend a lot of time working with them on solutions," he says. But the next client may offer up a wholly separate set of priorities. "They might be in expansion mode and therefore liquidity and working capital optimization is going to stay at current levels," Mr. Douglas says. Or they decide not to expand the way they use their ERP system, reasoning that they will just use it as is because current objectives are to move into new markets and prioritize resources on the expansion.

What Mr. Douglas and HSBC are looking to do is to support both scenarios using the concept of interoperability and open banking. Interoperability, via application programming interfaces (APIs), provides the capability for systems and organizations to work together seamlessly, based on common standards. This means partnering to more easily facilitate the thousands of transactions multinationals make daily by smoothing out bumps that get in the way.

Mr. Douglas says the bank has spoken about "interoperability" for many years in asset management, custody, prime brokerage and cash management. With rapidly expanding fintech solutions, the importance of interoperability has never been higher in the treasury space. It was a must for those sectors then and it's critically important for treasury liquidity and cash management now. "The more successful large international banks need to get the open architecture, the open banking, right," he says. "We can't partner with every fintech, but we think the world is changing quickly to one of open APIs, where we have a responsibility to interoperate across the fintech environment."

And that means looking at banking across everything from HSBC's own online offering, HSBCnet, "to a client's treasury management system, to their ERP systems, to SWIFT, to ACH payment process providers and to how that universe interoperates to the satisfaction of specific client priorities. Our focus is to support a thriving treasury environment," Mr. Douglas says.

Fintech investment

Since 2015, HSBC has been a strategic investor in cloud-based treasury management solutions provider Kyriba, and it also has investments in procure-to-pay company Tradeshift. And last year it joined forces with GT Nexus, a supply chain management platform that provides companies with end-to-end connectivity, visibility and collaboration with suppliers.

So HSBC, like many large global banks, is leveraging third parties within its own platforms to expand service offerings, enhance client experiences, increase efficiency and reduce cost. One of the offerings HSBC says is an attractive option for clients is its virtual accounts product, which is currently live in the UK and being rolled out in several other markets

Virtual accounts have been around for a long time, but they are now being used in a wider context. Mr. Douglas says customers often oversimplify the value of virtual accounts, thinking they only speed up the way in which one can, for example, open an account under the same entity. But they offer much more, he says, particularly if clients explore their value in the context of using them for receivables and payables management, in-house banking and managing liquidity. They also help companies with the thorny issue of having too many physical accounts. Replacing physical accounts with virtual ones, for example, can reduce administrative costs.

With virtual accounts, Mr. Douglas says, banks can let clients use a single account for multiple purposes. "Through the use of next-generation virtual accounts, if a company has a specific vendor or supplier it needs to receive from and pay to, it can create specific virtual accounts and better tracking of receipts and payments." Multipurpose accounts with huge volumes are extremely difficult for large corporations, he says. However, if the company is given a specific virtual account, and payables and receivables land in that account, they are much easier to execute, track and reconcile.

Companies can do this very quickly, which then allows them to understand where their cash reconciliation stands. "If you're a company running advanced cash forecasting, then reconciling your future forecasts of cash against your historic receivables is critically important. The faster you can do that the better," Mr. Douglas says.

The advantage of virtual accounts is that the path of that auto reconciliation can more easily be created and identified. That structure can be extended to multiple subsidiaries, each with separate virtual accounts with cash automatically being pooled, Mr. Douglas says.

He acknowledges this can be done on an Excel spreadsheet or even executed through a company's treasury management system. But with virtual accounts, companies are drilling down into the data at multiple levels, "and that's the purpose of virtual accounts."

Bringing Technology Agility Global

A good example of how HSBC is using its technology capabilities is in the natural resources sector, specifically oil and gas. Much of the feedback it has received has helped HSBC refine its product offering to make it more intuitive.

HSBC says feedback is also keeping the bank ahead when it comes to areas where corporations are less mature. Mr. Kawaguchi says that as the bank that sits in the middle, "HSBC can help many up-and-coming companies to go international and look at best practices that many of the larger multinational companies are using already."

"I think you'll see that we've undertaken a range of projects at HSBC to develop agile technology for the long-term benefit of the bank and our customers," Mr. Kawaguchi says.

And this is a must, he adds. "The digital age is right here, right now. It's no longer looking at blue skies and what's going to happen. It's happening. And many of the banks, many of our own suppliers, for instance, developers of ERPs or TMS, everyone is going digital; so, if you think about it and look at it from a client's standpoint, everyone is talking digital now, everyone is talking APIs; everyone is talking about open banking and talking about having a seamless connectivity. So you're seeing a convergence between multiple sectors and leveraging some of the best practices that are happening in one area of the company to help in others."

Adding Sustainability in the Mix

Of course, no discussion of the future of banking and technology can ignore how sustainability enters the equation, and HSBC is helping drive corporate consideration of the trend. For instance, in the shipping sector, which is loaded with paperwork and too much downtime at docks as ships await customs clearance, HSBC is working with partners to speed up the process and make it more efficient overall.

"The digital evolution that's happening right now has a significant impact on sustainability," Mr. Kawaguchi says. HSBC, like others in the banking sector, has recently come out with its own sustainability agenda. "So a key factor and drive for that change is actually digitalization. If you think about reducing the time ships are docked, there are several studies now where they're talking about the inefficiency of the lag time that's happening" while ships sit idle "because of either paperwork not being reconciled or paperwork not being stamped or vetted."

The customs world itself is also very inefficient and paper-driven, Mr. Kawaguchi notes, so HSBC is working with several corporates, shipping companies and customshouses on a blockchain project to help this part of the shipping process become more straight-through.

"All of this helps fosters more sustainability, helps reduce the carbon footprint [of the sector] in addition to taking out the whole paper in the treasury space. All of these efforts add up to a kind of common goal that has happened on the back of the Paris Accord," Mr. Kawaguchi says.

Robotic Process Automation 

The Bank of the Future

No matter where digitalization is applied—whether it is virtual accounts, natural resources or shipping—the bank of the future must embrace digital transformation and not look back. "A comprehensive digital transformation is a clear 'no regrets' move to prepare for a digital and data-driven world," states a McKinsey research report from 2017. This means that as banks become more client-centric, they must get comfortable with the open architecture/open banking concept. In fact, their distinctiveness may depend on it, as they strive to enhance the customer experience. They also must continually look ahead to and be thinking of the new digital capabilities that clients will need, not just in the next few years but in the next 10 or 20.

Mr. Douglas encapsulates this thinking with an example of one of HSBC's clients starting to embrace robotic process automation. "I think in today's world it is a conversation about not only what services we can provide them but also finding out what our clients are doing around robotics," he says. "We're very interested to find out what they're doing because whenever they employ robotics that means there's some process they're trying to automate or pain point they are trying to eliminate. If we can link to that and help, we become that much more valuable as a service provider."

Drew Douglas Lance Kawaguchi 
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